Hedge Funds Have Momentum After Posting Double-Digit Returns Last Year

Hedge funds delivered double-digit returns for the second year in a row in 2025, spurring expectations that more money will be allocated to the category this year, according to Goldman Sachs Prime Services. Hedge funds have also outperformed a traditional balanced 60/40 equity-bond portfolio in recent years.

Last year, hedge funds “deftly navigated significant volatility across geopolitical and trade tensions, monetary policy, and other market idiosyncrasies,” Freddie Parker and Vincent Lin, co-heads of Prime Insights and Analytics, write in a report. The share of hedge fund returns attributable to alpha, or risk-adjusted performance in excess of market gains, has reached the highest level in more than 30 years. 

“Returns have improved while the level of beta to markets has declined,” Parker and Lin say. The ability of hedge funds to produce uncorrelated returns has been particularly important for investors as the movements of equities and bonds have become more correlated in recent years. 

Hedge fund returns beat expectations in 2025

More than 90% of allocators report that their hedge fund portfolios met or exceeded expectations last year, according to a Goldman Sachs survey of 317 firms that allocate money to alternative investments, including pension funds, family offices, funds of funds, and other pools of capital. More than 80% of allocators also report that their hedge fund holdings met or beat expectations over the past five years.

Hedge funds returned an average of 11.8% last year and 11.9% in 2024. They have now outperformed a traditional balanced 60/40 equity-bond portfolio every year since the Federal Reserve started raising rates in 2022.

With the end of the era of the Fed’s quantitative easing, opportunities for hedge funds to boost returns improved markedly, according to Global Banking & Markets. During the 2010s, by contrast, hedge funds saw relatively muted returns amid suppressed volatility, tight correlations between assets, and low interest rates. In the decade through 2022, hedge funds underperformed a 60/40 portfolio by about 50 basis points annually, but since then they have outperformed by nearly 190 basis points per year.

More money is likely to flow into hedge funds this year

Almost half of the allocators surveyed (49%) say they plan to increase their exposure to hedge funds this year, up from 37% a year earlier, and just 4% say they plan to decrease exposure. The net figure of 45% seeking increased exposure is a record in Goldman Sachs data that goes back to 2017. 

The interest in boosting hedge fund exposure is most clearly focused on hedge fund strategies less likely to be correlated with other assets. Quantitative funds are the most sought-after category in this year’s allocator survey, with 25% of respondents expecting to add in this area. Discretionary macro funds also are getting more interest than they did a year ago, with 21% saying they plan to boost exposure. Parker and Lin note that demand for quant funds, in particular, is outstripping supply. 

The interest in quant strategies was highest among endowments, foundations, and family offices, even though these groups historically have invested more in equity long/short funds and other more directional strategies. “This is particularly notable as it suggests that many of these allocators are now moving toward more of an absolute return orientation” and may be favoring strategies with potential for uncorrelated returns, Parker and Lin write. 

After hedge funds, the next most popular asset group in the survey is private equity, with 35% saying they plan to increase allocations to the category this year, up from 32% of respondents a year earlier. Interest in private equity is still below the high levels seen in 2021 and 2022. Private credit saw a drop in interest, with 24% of allocators planning to boost exposure in 2026, down from 31% in the year-earlier data. 

Positive sentiment by allocators in recent years hasn’t always translated into positive flows into hedge funds, with slow distributions from private market investments inhibiting their ability to take on new positions. But 2025 saw inflows into hedge funds for the first time in several years—an estimated $79 billion in net inflows. “Given the bullishness we see toward hedge funds in the year ahead, we expect the flows picture to improve in 2026,” Parker and Lin write. 

Also notable is the performance of newly launched hedge funds in 2025. Multiple firms across the globe launched with more than $1 billion last year, highlighting the “continued dynamism” of the hedge fund industry, the team writes. 

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